Deal activity resilient in managed services

14 Oct 2022 , 01:22 PM

Key takeaways include:

• Managed services ACV declined 2% on a YoY as well as QoQ basis in Q3CY22, on a tough base; robust demand for ER&D and industry-specific BPO continued, while legacy infra was weak.
• ISG maintained growth forecast for 2022 for managed services ACV at 3.5% YoY (reduced in Q2 from 5.1%), as ADM continues to reach record highs and BPO business remains strong.
• As-a-service ACV declined 3% YoY and was flat QoQ, as Chinese hyperscalers continued to be affected by regulatory challenges and stringent COVID-19 policies; ISG expects growth for American hyperscalers to slow down as well.
• Thus, for 2022, ISG lowered its outlook to 10.5% YoY (from 18%) in as-a-services ACV.
• While some sequential slowdown in contracting activity was seen, ISG believes demand remains robust, although macro concerns are delaying enterprise decision making. Attrition continues to stabilize as record number of hires become billable.

YoY slowdown in contract activity off a tough base

Combined ACV in Americas saw growth of 1% YoY in Q3CY22, as strength in as-as-ervice ACV (+10% YoY) was offset by weakness in managed services. EMEA grew 7% YoY, since both as-a-service and managed services ACV held up – growing 9%/6% YoY, respectively. APAC saw sharp decline of 29% YoY in combined ACV.

Key notables from the con-call

• While demand for services is resilient, enterprises are delaying decisions on large, transformation projects due to ongoing macro concerns, though cost-optimization deals are witnessing traction.
• Within managed services, strong demand for industry-specific BPO (+71% 9M22 versus 9M21), ER&D (+19%) and digital CX (+48%) and sizeable decline in legacy infra (-8%) continues.
• As-a-service sequential growth rate was impacted by lower deal activity in China. ISG expects US hyperscalers to see growth slowdown in the coming months, due to their exposure to segments such as retail.
• Macro risks around rising interest rates, tight supply chain, fragile situation in Europe, and FX could impact tech budgets in 2023.

Commentary by Indian IT firms indicates resilience in demand

Indian IT firms have reiterated healthy demand in their recent commentary, although alluding to elongated deal conversion timelines and macro uncertainties. Analysts at IIFL Capital Services expect Indian IT services sector to clock USD revenue growth of 10% in FY23-FY24 (versus 19% in FY22), which is still above pre-COVID levels. However, valuations are near pre-COVID levels. Analysts at IIFL Capital Services prefer Infosys among large-caps and Persistent, Mindtree among mid-caps in the sector.